A recent ACCA report discussed how differing definitions of materiality affect the boundaries of materiality decisions made by companies. In light of this report, we wanted to offer SASB’s perspective on natural capital and materiality in the context of mandatory disclosure to the Securities & Exchange Commission (SEC).

SASB develops sustainability accounting standards for publicly-listed U.S. companies. The standards are designed for the disclosure of material sustainability issues in SEC filings. By the end of 2014, SASB will have issued standards for 45 industries. By early 2016, SASB standards for more than 80 industries in ten sectors will be available.

While FASB and US GAAP exist for the purpose of disclosing corporate performance through metrics focused on financial capital, SASB’s concern is with accounting for material non-financial issues, including environmental and social capitals that are not accurately priced. SASB is defining parameters that express a true and fair representation of performance on non-financial issues, for investors and analysts to use in evaluating companies. This picture includes attention to the management of critical capitals, vulnerability to depletion, and risks associated with mismanagement. SASB’s approach to sustainability accounting consists of determining standard disclosure and metrics to account for companies’ performance on material sustainability issues.

So, how will SASB standards change corporate performance? By helping companies to account for all forms of capital. Accounting for sustainability impacts means measuring, verifying, and reporting—in other words, being accountable for—the environmental, social, and governance (ESG) performance of an organization. Sustainability accounting standards are intended to complement financial accounting standards. The goal is for investors to be able to evaluate financial fundamentals and sustainability fundamentals side by side. With this information, investors can assess ESG risks and opportunities in an investment portfolio, and companies can improve performance on the ESG issues most relevant to their business success.

The impacts of business on society and the environment, as well as the impact of sustainability issues on business, are often headline news. The perfect storm of global population density, food and water security issues, and extreme weather events is not predicted to subside. Thus, companies need to better understand how these factors inhibit and/or enhance their ability to create value, for shareholders and society alike. SASB’s industry-specific guidelines help companies identify the ESG issues that are likely to be material to their business, and provide investors with the ability to compare company performance on these issues. SASB is using a rigorous method to develop standards that are tailored to each industry. By identifying the minimum set of material issues for every industry, SASB standards surface the information that truly matters. SASB standards are designed to be cost-effective for companies and decision-useful for investors.

Our standards abide by the U.S. Supreme Court’s definition of material information, defined as presenting “a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the “total mix” of information made available.” Regulation S-K requires corporations to disclose material information to investors in the Form 10-K. While FASB provides standards for the disclosure of material financial information, there are no standards for the disclosure of material non-financial information. SASB is emerging to fill this need.

As we head deeper into the 21st century, it is already clear that developments in digital technologies are going to affect the world even more radically over the next 20 years than in the last 20 years. As new digital technologies emerge and converge they will reshape lifestyles and business activities, how economies develop, and how countries are governed, in revolutionary ways.

Digital Darwinism: thriving in the face of technology change, is a report by ACCA and IMA that focuses on the top ten technology trends that could impact the finance profession. One of the trends identified was cybersecurity; a topic that we’ve been focusing on in the United States over the past two years.

Information is now collected, stored and shared using numerous software and devices. Unfortunately, reliance on these digital technologies exposes individuals, organisations and entire countries to a host of both deliberate and non-malicious threats. Theft of digital information has overtaken physical theft as the most commonly reported fraud, and the relative insecurity of the small and medium-sized enterprises (SMEs) is making them a growing focus for cyber-attacks. As ever more products and services are provided, sourced and accessed online the security of data and systems becomes increasingly complex and their governance becomes increasingly important.

All organisations need to:

understand the nature and likelihood of cyber-threats

identify, assess and mitigate existing and emerging risks

implement and maintain strong controls and policies to govern data privacy and security

educate users on emerging risks, such as those associated with mobile devices and social media

plan for increasing complexity, and

make technological risk a board-level concern.

Cybersecurity is an area where an organisation can achieve limited outcomes by working alone. To combat emerging cybercrimes effectively and catch and punish attackers; companies, industries and governments will need to collaborate to:

share information on cybercrime, and

create consistent, uniform and better global regulations.

These steps will enable them to provide citizens and businesses with appropriate protection from cyber-attacks. In order to effectively combat the growing range of emerging cybercrimes and catch and punish attackers, companies, industries and governments will need to collaborate to:

cooperate and share information on cybercrime

create consistent, uniform and better global regulations, and

provide citizens and businesses with appropriate protection from cyber-attacks.

Cybersecurity has become so complex and multifaceted that expertise is needed just to understand many of the risks, before the viability of the products and services that promise to address them can be considered. Accountants are acutely aware of the need to take adequate steps to protect computer systems and data against a growing range of deliberate and accidental cyber-risks. In the research cybersecurity was the leading technology priority, and 79% of respondents expect the need to assess, protect and mitigate cyber-risks to increase in significance over 2014–15.

On the face of it, there seems to be an association between security concerns and action to address risk, but what appears to prompt such initiatives is not the awareness of specific risks but the feeling that risks in general are multiplying, becoming more threatening and leading to higher losses.

Read more about the technology trends that are impacting on the accounting profession at http://roleofcfo.com/

I was fortunate to chair a roundtable on the future of audit while MEP Karim, rapporteur for the JURI committee on the EC audit proposals, was in New York recently on a fact-finding visit to understand more about the US and the global audit market, to consider the broader impact of the EU audit proposals. The roundtable attracted a wide range of attendees, and it was interesting to hear the perspectives from the US. Not surprisingly, much of the debate focussed on the critical EU proposals such as mandatory auditor rotation, tendering and non-audit services.

There were some general recurring themes that arose at the roundtable:

Although a single country, the US state system is not so different to EU member states – for example auditors are required to be registered with the state.

The distinction between public company audit (regulated by PCAOB and SEC) and private company audit (AICPA and state) is quite significant.

The rules on audit committees are set by the SEC. These tend to relate to the legal requirements, including independence of Audit Committee (AC) members, rather than the functioning of the AC, and there was strong support for an enhanced, and more transparent, role for the AC. There was general support for the role of the AC in evaluating non-audit service provision.

There was very strong disagreement with mandatory audit rotation across almost all sectors (in line with the feedback to the recent PCAOB consultation on the topic), and in fact the day before the roundtable a motion was tabled in Congress to prohibit any proposed rules on this. The practical impact on global businesses of potentially different mandatory rotation requirements in different jurisdictions was noted. However, it appears PCAOB may still be interested in pursuing rotation.

We support strengthening the role of the audit committee and increased transparency

We do not support mandatory rotation of auditors as we do not believe that there is evidence that supports an improvement in audit quality as a result

We do not support restricting the role of professional bodies, particularly in relation to the monitoring of auditors of unlisted entities.

Following the approval on MEP Karim’s report, the focus now moves to the Council. Let’s hope that they will recognise the good work that has been done in the Parliament as they now work on their revisions to the audit proposals …

According to The Changing Role of the CFO, a new report co-published by ACCA and IMA®, CFOs will face many challenges in the future, including global economic uncertainty and volatility, fluctuating energy prices, and turbulent currency markets, along with a shift in economic power. The report identifies emerging priorities that will impact the future role of the CFO and cites nine future key issues that will shape the finance function’s top job, including regulation, globalisation, technology, risk management, transforming finance, stakeholder engagement, strategy, integrated reporting, and talent.

Of course, these emerging priorities could well vary by global region depending on regulation, socio-economic factors, environmental conditions, culture, and more. But as a former U.S.-based CFO, I wonder if we in the U.S. face a couple of unique challenges associated with regulatory uncertainty and litigation. These issues exacerbate the ‘day-to-day’ challenges – and opportunities – of today’s CFO team.

First, let me tee up the uncertainty associated with regulation. Usually, when we discuss the CFO team’s lead role in dealing with uncertainty and disruption, it is in connection with consumers and competition, not regulation since that tends to be a ‘known’ quantity with exposure drafts, comments letters, discussion roundtables etc. before a regulation associated with financial reporting even goes into effect. Specifically, I am focusing on the uncertainty associated with adoption of IFRS in the U.S. Will the U.S. adopt IFRS? If not in full, what would an ‘incorporation’ model look like? The larger questions are around the degree to which U.S.-based CFO teams should begin the training process and technology changes necessary to affect a massive shift from the decades-old US GAAP. This is not the resource allocation challenge that CFOs deal with every day in trading off returns on various investments; it is a long-term decision to invest in training and technology without clarity as to ‘if, how and when.’

Smart CFOs will need to do two things: (1) Hire and nurture good technical talent, so adopting to any deviation to pure-play GAAP will be that much easier; and, (2) Stay close to the regulatory scene and be a proactive advocate for the best solution (e.g., SEC, FASB, IASB, IFRS Foundation, etc.)

The second, arguably unique challenge for U.S.-based CFOs is with integrated reporting, or, the evolution of external corporate reporting. At least in the U.S., the external disclosures are voluminous and yet do not adequately inform stakeholders as to long-term sustainable value generation and growth because they are too financially focused, too complicated, and yet not comprehensive enough. But the unique challenge in the U.S. is not so much about selecting more non-financial measures, or measures more of a leading indicator variety, or even how to source and report measures such as employee learning and growth, process improvements, sustainability, carbon footprint, societal contributions, or governance factors. It is the litigious nature of society and an often ‘unforgiving’ regulatory environment in the U.S. If this challenge is approached as ‘let’s report everything – and thus subject it to internal controls and audit – because it may be useful to some stakeholder in the future,’ then much like in the early days of Sarbanes-Oxley, integrated reporting will be viewed as a ‘social tax’ with little societal good and expensive shackles placed on corporate entities. There are no easy answers here, but leading CFOs need to be at the table to find the right balance, rather than waiting for the steam-roll effect of transforming external corporate reporting ‘to just happen.’